If any elected official stood before Congress and proposed raising taxes for the average family of four by $3,380 per year, he or she would find himself voted out of office in the next election.
Kill All the Trial LawyersIf any elected official stood before Congress and proposed raising taxes for the average family of four by $3,380 per year, he or she would find himself voted out of office in the next election. Yet, that’s the amount of the hidden cost that Americans pay to support tort litigation in the U.S.Every man, woman, and child pays an average of $845 a year in tort costs. Between 2000 and 2003, those costs soared by 35.4 percent. And it’s not just a recent phenomenon: The relentless rise of tort litigation expenses has exceeded the growth of the Gross Domestic Product by two to three percentage points for the past half-century.To illustrate, think of the economy as a sprinter gaining speed with every step; now, imagine that same sprinter with a backpack filled with bricks strapped to his back. Thatwill give you a sense of how the costs of wasteful, frivolous lawsuits create a drag on our economy.According to a report issued by Jim Saxton, the vice-chairman of the Joint Economic Committee of Congress,1 the United States pays more than twice as much in tort costs as most industrialized nations. Research conducted by Tillinghast-Towers Perrin shows that the cost of such litigation in the U.S. went from $67 billion to $152 billion in the 10 years between 1984 and 1994.The U.S. tort litigation system is not only expensive, it’s inefficient. It returns less than 22 cents on the dollar to repay actual economic losses to claimants, while the rest goes to lawyers and administrative costs. It doesn’t help that, according to the Washington Times,2 some attorneys are now charging fees at a rate of $30,000 per hour. How can a system that costs so much, and does so little, continue to exist?The answer is that the tort bar has become “a beneficiary of pork barrel politics at best” and “an enormous criminal enterprise at worst,” through a system of perverse incentives. To illustrate, consider the high-profile example of Vioxx, the painkiller made by Merck.In September 2004, Vioxx was linked to heart attacks and strokes. Smelling profits, lawyers filed more than 10,000 lawsuits against Merck. In one of those cases, a jury awarded $253 million to a Texas woman whose husband died of a heart attack while taking Vioxx. That is equivalent to earning more than $6 million a year for 40 years. Not surprisingly, an entire industry sprang up to milk these cases.The Vioxx case is reminiscent of the lawsuits against makers of asbestos, which began when scientists in the 1970s linked the fire-retardant material to various diseases. Lawyers sought out favorable jurisdictions and the suits bankrupted 70 American companies, causing the loss of 60,000 jobs.In addition, another 138,000 jobs that would have been created in the asbestos industry never materialized, according to the RAND Institute for Civil Justice.3 Without tort reform, another half-million people will lose their jobs from similar actions. In other words, out-of-control litigation hobbles the economy and hurts everyone.More than 8,000 companies have been named as defendants in asbestos lawsuits. Without reform, another 2.4 million claims could be filed in the next few decades. Unchecked, the cost of asbestos suits alone could total $300 billion, more than the cost of all Superfund sites, Hurricane Katrina, or the 9/11 attacks. Therefore, it’s not an exaggeration to say that the tort system is a national catastrophe.Making matters worse, there is ample evidence that many of the asbestos suits were fraudulent. Senate Report 109-0974 pointed out faked medical tests and illegal coaching of clients, who were encouraged to lie under oath. The report found that more than 90,000 of the claimants had no illness related to asbestos, yet had the support of medical experts who profited from those cases. Of 850,000 cases examined in the report, 600,000 were found to be baseless claims.Asbestos litigation has spawned some of the most egregious cases in legal history. According to a report in the Palm Beach Daily Business Review,5 a prominent Miami plaintiff’s attorney, Louis Robles, spent a decade stealing $30 million from his 7,000 clients, many of whom were poor, old, and sick. With the money from their asbestos settlements, he bought a mansion worth $15 million in Key Biscayne and a condo in Colorado, and financed movie productions. The clients received little or nothing.The most notorious class-action law firm in the U.S. is Milberg Weiss Bershad & Schulman. The firm filed hundreds of dubious class-action lawsuits until some of its partners were indicted by a Los Angeles grand jury on charges of conspiracy, racketeering, obstruction of justice, mail fraud, money laundering, and filing false tax returns. In one case, Milberg Weiss filed at least 70 lawsuits on behalf of the same plaintiff.For years, reformers have been stymied in their efforts by the political clout of tort lawyers. But, increasingly high-profile stories of abuse and fraud like the ones we’ve been discussing are undermining the political clout of trial lawyers, and giving tort reform increased momentum. In addition, popular opinion is moving against this type of litigation, because it is ordinary citizens who pay the costs in the form of higher insurance premiums, higher medical costs, and higher prices for goods and services.Moreover, entrepreneurs, who create the new jobs and new industries that fuel the economy’s growth, are increasingly discouraged by the threat that their innovative products will attract lawsuits. A company that gets caught up in lengthy litigation can spend years in court, at a cost of hundreds of millions of dollars in legal costs and lost productivity.This in turn means that each of those companies does less business, which slows down job expansion and economic growth in general. That results in lower wages and fewer jobs. One estimate, by the University of Texas, says that the economic output of the U.S. is reduced by $300 billion to $660 billion a year by our faulty tort system.That’s one reason that President Bush signed into law the Class Action Fairness Act in February of last year, representing the most comprehensive federal tort reform so far, according to a report in Business Insurance.6Other significant reforms are underway at the state level, including limiting non-economic medical liability to $300,000 in Oklahoma and curtailing contingency fees in Florida. The effects of these types of reforms can be seen in Texas, where the legislature passed a bill in 2003 to limit non-economic damages to $750,000. Since then, Texas has enjoyed economic growth, increased jobs, and more accessible health care.The American Medical Association dropped Texas from its list of states in “medical liability crisis.” Malpractice claims are down, and insurance rates have dropped, collectively saving doctors $50 million. As a result, the Houston area has seen a net gain of 689 new physicians.7Mississippi passed similar legislation in 2004 and experienced nearly $60 million in increased business investment, as well as a drop in insurance rates. Similar measures have recently been passed in Missouri, New Jersey, and West Virginia with comparable results.Pennsylvania has seen a giant asbestos suit disintegrate as physicians refused to testify when their diagnoses were questioned. And in Texas, a grand jury is investigating fraudulent silicosis lawsuits. In Congress, Ed Whitfield of Kentucky is holding hearings in the House Oversight and Investigations Subcommittee on silicosis fraud.In light of this trend, we offer the following six forecasts:First, over the coming decade, the burden of tort litigation will lift from the economy, as tort reform sweeps the nation. As we have been predicting for some time now, American citizens are fed up with a legal system that delays legitimate awards for real damages, then hands over much of the money to lawyers instead of to the injured parties. Bear in mind, though, that the tort bar still has tremendous political influence, so this will be a slow process, moving state by state until at least 2015.Second, one of the forces that will drive these reforms is the high cost of health care. As highlighted in prior issues of Trends, the United States is suffering from a shortage of physicians. Part of the shortage stems from the fact that so much of a doctor’s income is eaten up by insurance premiums. A recent research study showed that states that limited medical malpractice awards have more doctors. Rural counties in states with limits had 3.2 percent more physicians per capita. For example, with a $250,000 cap, there were 5.4 percent more obstetricians than in states with higher caps. People will quickly catch on that if they want good health care, they have to vote for the reforms that will attract more doctors to their area.Third, federal tort reform will continue, but most of the progress will be made at the state level. States are where most of the laws exist and where most of the cases are heard. The American Tort Reform Association designates certain jurisdictions as what it calls “judicial hellholes” that have a negative climate for defendants in civil litigation.8 In its latest report, the association identified six such areas, including the Rio Grande Valley and Gulf Coast in Texas; Cook County, Illinois, including Chicago; West Virginia; South Florida; and two other Illinois counties. As federal laws are passed to reform the courts, such places will become obvious magnets for bad litigation. And, they will come under increasing pressure to reform themselves. Already Hampton County in South Carolina, once listed as a “judicial hellhole,” has enacted reforms that removed it from the list.Fourth, these reforms will ultimately put an end to nonsense lawsuits. According to the Chicago Sun-Times,9 an Illinois couple sued American Airlines for more than $100,000 because they didn’t have enough legroom on a flight to Paris and experienced leg cramps. Whether plaintiffs win these types of cases or not, such frivolous lawsuits result in direct costs to other passengers in the form of increased fares to cover the airline’s legal fees and rising insurance premiums. Efforts are now underway to disbar lawyers who bring frivolous lawsuits to court.Fifth, reforms at both the federal and state levels will put an end to venue shopping. Such reforms will require that a real or perceived injury must be litigated in the jurisdiction where it occurred. Plaintiffs won’t be able to move their cases to jurisdictions where they would have the best odds of winning. This reform will open the way to a realistically fair system to right genuine wrongs, and will strip the system of the nuisance cases that make it so costly.Sixth, by 2015, everyone, except for the trial lawyers, will experience the overall economic benefit of these reforms. Doctors will see malpractice premiums go down ? and patients will be charged less for health care. Manufacturers of all sorts of products will save on insurance, and pass at least some of those savings on to customers. Auto manufacturers will be encouraged to make cars safer, even while drivers see insurance costs reduced. Those who have truly been wronged will receive a higher percentage of their legitimate settlements or awards. And the courts will function more smoothly and rationally when freed from the inordinate burden under which they now labor. References List : 1. To download a copy of the Joint Economic Committee’s report on the U.S. tort system, visit the JEC website at: www.house.gov 2. The Washington Times, September 24, 2003, “Lawsuit Industry Generates Billions,” by Marguerite Higgins. ⓒ Copyright 2003 by The Washington Times. All rights reserved. 3. To download a copy of the RAND Institute for Civil Justice’s report on asbestos litigation costs, visit their website at: www.rand.org 4. To access Senate Report 109-097, visit the U.S. Government Printing Office websit at: frwebgate.access.gpo.gov 5. Palm Beach Daily Business Review, May 24, 2006, “Disbarred Lawyer Pleads Not Guilty to Federal Charges; Indictment,” by Julie Kay. ⓒ Copyright 2006 by ALM Properties, Inc. All rights reserved. 6. Business Insurance, January 9, 2006, “Tort Reform Backers Hope to Stay on Winning Streak,” by Mark A. Hofmann. ⓒ Copyright 2006 by Crain Communications, Inc. All rights reserved. 7. U.S. Fed News, May 12, 2006, “Tort Reform Working in Texas.” ⓒ Copyright 2006 by Hindustan Times. All rights reserved. 8. Associated Press, March 27, 2006, “Missouri Applauded for Tort Reform; Reports Says Illinois Lags,” by Jeff Douglas. ⓒ Copyright 2006 by The Associated Press. All rights reserved. 9. Chicago Sun-Times, May 14, 2004, “Couple Sue Airline Over Legroom,” by Steve Patterson. ⓒ Copyright 2004 by Chicago Sun-Times, Inc.
